Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: The Company is the world's largest kidney dialysis company, operating a vertically integrated business providing dialysis services and manufacturing dialysis products. As of December 31, 2007, it operated 2,238 clinics in over 25 countries, treating 173,863 patients. The Company transformed its legal form from a stock corporation to a partnership limited by shares (KGaA) in 2006, with Fresenius SE controlling the general partner.
Key Financial Metrics (2007)
| Metric | 2007 Value | 2006 Value |
|---|---|---|
| Net Revenues | $9,720 million | $8,499 million |
| Gross Profit | $3,356 million | $2,878 million |
| Operating Income | $1,580 million | $1,318 million |
| Net Income | $717 million | $537 million |
| Diluted EPS (Ordinary) | $2.42 | $1.81 |
| Total Assets | $14,170 million | $13,045 million |
| Total Long-Term Debt | $4,668 million | $5,083 million |
| Shareholders' Equity | $5,575 million | $4,870 million |
| Working Capital | $833 million | $1,036 million |
| Cash from Operations | $1,200 million | $908 million |
Margins: Gross margin was 34.5% in 2007 (up from 33.9% in 2006). Operating margin was 16.3% (up from 15.5%).
Debt & Liquidity: Consolidated debt totaled approximately $5.64 billion (including $1.33 billion in trust preferred securities). The debt-to-equity ratio was 1.01. Cash and cash equivalents were $245 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 14% (12% at constant currency) driven by organic growth (6%), the Renal Care Group (RCG) acquisition (4%), and other acquisitions (2%).
- Profitability: Net income increased 34% to $717 million. Operating income rose 20% to $1,580 million.
- Acquisitions: Completed the acquisition of Renal Solutions, Inc. (RSI) in November 2007 for up to $204 million to advance home hemodialysis technology. Total acquisition spending in 2007 was $352 million.
- Divestitures: No major divestitures in 2007; the 2006 period included a $40 million gain from the divestiture of 105 clinics required by the FTC for the RCG acquisition.
- Share Split: Completed a three-for-one share split effective June 15, 2007.
- Reimbursement Environment: EPO (erythropoietin) revenue was impacted in the second half of 2007 by decreased utilization and reduced government reimbursement rates due to new CMS policies and FDA safety warnings.
Guidance, Outlook, and Risks
2008 Outlook
- Net Revenues: Greater than $10,400 million.
- Net Income: $805 million to $825 million.
- Capital Expenditures: Approximately $650 million to $750 million.
- Acquisitions: Approximately $150 million to $250 million.
- Leverage Ratio: Less than 2.8.
Key Risks and Contingencies
- Regulatory & Reimbursement: Significant reliance on U.S. Medicare/Medicaid (approx. 36% of consolidated revenue). Risks include changes in reimbursement rates, the "expanded bundle" proposal, and CMS policies limiting EPO dosing and reimbursement.
- Legal Proceedings: Ongoing DOJ investigations regarding laboratory testing, physician compensation, and anemia management programs. A civil complaint was filed in July 2007 seeking damages related to RCG's supply company operations.
- Tax Audits: Ongoing audits in the U.S. and Germany. The Company paid $99 million in 2006 related to U.S. tax audits and faces potential additional payments if appeals are unsuccessful.
- Product Liability & Competition: Risks related to generic drug competition, patent expirations, and product liability claims.
- Debt Covenants: Substantial indebtedness requires compliance with financial ratios (fixed charge coverage and leverage). Breach could trigger defaults.
Investor Verification Checklist
- EPO Reimbursement Impact: Verify the specific financial impact of the new CMS anemia monitoring policy and FDA safety warnings on 2008 North America segment margins.
- Legal Exposure: Review the status of the DOJ investigations and the civil complaint filed in the Eastern District of Missouri regarding RCG's supply company to assess potential liability.
- Tax Contingencies: Assess the likelihood and potential magnitude of additional tax payments resulting from ongoing U.S. and German audits.
- Debt Maturity: Confirm the refinancing strategy for the $678 million of Trust Preferred Securities redeemed in February 2008 and the remaining $664 million due in 2011.
- Acquisition Integration: Monitor the integration progress of Renal Solutions, Inc. (RSI) and the realization of synergies in home hemodialysis.